2nd home/future investment property/future rental how to enter carrying costs of property like utilities and garbage, etc into TT???

[pzp107]

We recently (2020) purchased a 2nd home/property. We utilized a cash out refinance to purchase the 2nd property combined with some extra money we had. We seem to be able to input that correctly into Turbotax. Our intention is to rent the the main building's 4 apartments out and for me to utilize the separate detached garage for my business purposes in the future. For 2020 we did not attempt to rent the property as major renovations had to be completed and this renovation process will continue into 2021 for at least a few more months. So currently we were told it would classify as a second home/property. We understand where to put the mortage interest deduction etc. But where would you input some of the carrying costs like utilities/garbage/etc? Maybe we are misunderstanding what can be deducted but were told that we should be able to deduct those costs yet cant find a place to input them into TurboTax. Any help or guidance would be appreciated. And if any followup info is needed please let me know and I will reply ASAP. 

[pzp107]

After reading a few articles it seems like our 2nd property would be considered and investment property but we still dont understand how to take the deductions for the carrying costs or capitalize them via the cost basis of the property???? ANy help on process and if this is correct would be helpful as we dont understand even how to make the declaration to add it to the cost basis. The other posting was unclear. Thanks in advance. 

[Carl]

Basically, and under the assumption that the utilities are being used by contractors in the process of the property renovations, you'll "probably" be able to include some of those costs as a part of the cost of the property improvements. But for right now and until the property is "available for rent", the only things you can deduct on your 2020 tax return are the property taxes and mortgage interest as a SCH A itemized deduction.

[pzp107]

Thanks for the reply. I found another reply to someone elses question that read this: 

It depends on what you mean by "investment real estate property".  If it is active rental property, then it goes on Schedule E.  If it is unproductive or vacant property being held for appreciation, then it goes on Schedule A , line 5b and subject to the 10K total limit.

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 The carrying costs (e.g.  repairs, insurance & utilities) of investment property are not deductible, staring with tax year 2018. Real estate (property) tax may be deducted on schedule  A.

Alternatively, taxpayers can elect to capitalize (add it to your cost basis)  the carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (Regs. Sec. 1.266-1(b)(1)).  The election is made with the tax return by its due date, including extension, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. Attach the statement to the return and write “Filed pursuant to section 301.9100-2” on the statement. You may add the carrying costs, incurred in the year of sale, to your cost basis. 

Mortgage interest is only deductible to the extent of other investment income and not subject to the 2% of AGI rule,  but can be capitalized. 

Is this something that can be done and how do you make that declaration (like is it a form of somekind) so it can be added to your cost basis? 

[DianeW777]

In addition to what @Carl explained above, expenses such as ongoing expenses, not including any expenses that will be part of the cost of the property itself because they are capital improvements, paid before the property is available for rent can be considered start-up expenses.  

Utilities, Insurance, etc: Costs you incur before you are actually in business of a rental activity are called start-up expenses. Special tax rules govern the deduction of these costs. Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins.

Start-up Expenses: You can deduct up to $5,000 in these expenses the first year your rental is available for rent. For the past several years this limit has been $5,000. You’ll have to deduct any additional start-up expenses in excess of the first year limit in equal amounts over the first 180 months (15 years) you’re in business. This is referred to as an amortization deduction and is similar to depreciation but somewhat different.  TurboTax will help you with this deduction. 

To be clear, the only expense that is currently deductible is mortgage interest and real estate taxes on the personal part of your return with other itemized deductions on Schedule A.

[Carl]

can be considered start-up expenses.  

Unfortunately, that's not true for residential rental real estate reported on SCH E of a 1040 personal tax return.  It "is" true for a SCH C business, but not SCH E rental or royalty income.

If the contractors are using the utilities in the performance of completing the renovations, then the cost of those utilities (or an equitable portion thereof) can be included in the cost of the property improvement.

But until the property is available for rent, the property insurance is flat out not deductible at all on the federal return, and the mortgage interest and property taxes are SCH A itemized deductions.

[Anonymous_]

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@pzp107 wrote:

Is this something that can be done and how do you make that declaration (like is it a form of somekind) so it can be added to your cost basis? 

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After tax reform (the TCJA) you can no longer add carrying costs to your basis per Regs. Sec. 1.266-1(b)(1) if the costs are not "otherwise expressly deductible".

[miller47712]

Read IRC 266, can add carrying charges to basis

[Anonymous_]

Read the section I cited in my post. The carrying charges must be otherwise deductible.

https://www.law.cornell.edu/cfr/text/26/1.266-1

[Opus 17]

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@miller47712 wrote:

Read IRC 266, can add carrying charges to basis

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This is a matter of debate.  To capitalize your carrying charges they must be "otherwise deductible".  Carrying charges on investment property used to be deductible as miscellaneous itemized deductions subject to the 2% rule, but this deduction was eliminated for tax years 2018-2025.  I did read an article in an accountancy journal that suggested that the carrying charges were still technically "deductible" because they are still listed under the regulations, even though the overall 2% rule is paused.  The article indicated they had asked the IRS for a ruling and the IRS had not responded.  However, since you definitely can't "deduct" the carrying charges using the plain language meaning of the word "deduct", I would suggest that trying to capitalize your carrying charges is a high risk strategy and you will want professional advice and representation before you do that.